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Towards a Political-Economic Theory of Domestic Debt

In: The Debt Burden and its Consequences for Monetary Policy

Author

Listed:
  • Allan Drazen

    (University of Maryland
    NBER)

Abstract

There is a large literature on why countries choose to issue debt rather than financing expenditures by current taxation. If Ricardian equivalence holds and taxes are non-distortionary, then it doesn’t matter whether government expenditures are financed by debt or taxes. When taxes are distortionary, debt can be used to smooth taxes and the associated distortions when the desired path of government expenditures is not smooth (Barro, 1979). In the absence of Ricardian equivalence, issuing debt rather than levying taxes may reflect short run stabilization considerations. The choice of whether to use taxes or debt may well also reflect concerns about the effects on private investment and capital accumulation, with debt possibly crowding out private capital accumulation, as in Diamond (1965). A government may also issue debt in order to influence or constrain the decisions of future governments (Lucas and Stokey, 1983; Persson and Svensson, 1989).2

Suggested Citation

  • Allan Drazen, 1998. "Towards a Political-Economic Theory of Domestic Debt," International Economic Association Series, in: Guillermo Calvo & Mervyn King (ed.), The Debt Burden and its Consequences for Monetary Policy, chapter 6, pages 159-178, Palgrave Macmillan.
    • Handle: RePEc:pal:intecp:978-1-349-26077-5_6
    DOI: 10.1007/978-1-349-26077-5_6
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    Citations

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    Cited by:

    1. Marina Azzimonti & Vincenzo Quadrini, 2024. "International Spillovers and Bailouts," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(1), pages 77-128.
    2. Michael Kremer & Paras Mehta, 2000. "Globalization and International Public Finance," NBER Working Papers 7575, National Bureau of Economic Research, Inc.
    3. Carmen M. Reinhart & Christoph Trebesch, 2015. "The Pitfalls of External Dependence: Greece, 1829–2015," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 46(2 (Fall)), pages 307-328.
    4. Waldenström, Daniel, 2010. "Why does sovereign risk differ for domestic and external debt? Evidence from Scandinavia, 1938-1948," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 387-402, April.
    5. Debora Di Gioacchino & Sergio Ginebri & Laura Sabani, 2005. "Public debt repudiation in a monetary union: the role of the geographical allocation of domestic debt," Working Papers in Public Economics 81, University of Rome La Sapienza, Department of Economics and Law.
    6. Avdjiev, Stefan & Binder, Stephan & Sousa, Ricardo, 2021. "External debt composition and domestic credit cycles," Journal of International Money and Finance, Elsevier, vol. 115(C).
    7. Marina Azzimonti & Vincenzo Quadrini, 2019. "International spillovers and `ex-ante' efficient bailouts," 2019 Meeting Papers 318, Society for Economic Dynamics.
    8. Philipp Harms & Joachim Lutz, 2014. "Foreign vs. domestic public debt and the composition of government expenditure: A political-economy approach," Working Papers 1415, Gutenberg School of Management and Economics, Johannes Gutenberg-Universität Mainz, revised 20 Nov 2014.
    9. Antonis Adam & Kostas Karanatsis, 2019. "Sovereign Defaults and Democracy," Comparative Economic Studies, Palgrave Macmillan;Association for Comparative Economic Studies, vol. 61(1), pages 36-62, March.

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